SMALL BUSINESS; Pools of Angels Make the Money Hunt Easier

By ANNE FIELD

Published: June 23, 2005

About two years ago, Jack Wheeler set out to raise money to hire a staff for MicroPhage, in Longmont, Colo., his start-up company that provides technology for detecting bacteria. He knew it was too early in the game to attract venture capital, so he began sounding out that amorphous network of private investors known as angels.

Angels are wealthy individuals who typically sink around $50,000, into promising new companies in the hope of lush returns down the road. They are often the best hope for struggling start-ups that are high on promise and low on cash. The problem for entrepreneurs is that to get the money they need, they often have to negotiate a confusing array of 5, 10 or even more separate deals.

Mr. Wheeler benefited from a slowly building trend that got a push from the dot-com bust: the emergence of angel groups whose members pool their resources and often assign a manager to help with their bargaining or administrative chores.

The $2.5 million he collected in two rounds of financing came from 22 investors, but because most of them belonged to one of two angel organizations, he negotiated with their representatives rather than dealing with them one by one.

While most of the nation's estimated 225,000 active angels continue to operate independently, those who join such collaborative arrangements represent an increasingly influential minority. Jeffrey E. Sohl, who directs the Center for Venture Research at the University of New Hampshire in Durham, says the number of active groups has increased from about a dozen a decade ago, when the formation of the Band of Angels in Silicon Valley made headlines, to about 135 today.

What explains the phenomenon? In large part, it is a reaction to the losses many angel investors incurred in the Internet meltdown. Organized groups provide members with a community of business experts who can not only help evaluate deals, but also spread the risk.

''We're seeing the return of a sadder but wiser angel,'' said John May, vice chairman of the Angel Capital Association and managing partner of the New Vantage Group in Vienna, Va., which runs several angel groups.

The association, a two-year-old organization financed by the Ewing Marion Kauffman Foundation in Kansas City, Mo., to encourage the development of angel groups, has also played a part. It has about 90 members, up from an original 40.

Whatever the reason, the groups provide an efficient way to manage a growing gush of money from rich people's pockets to entrepreneurs' tills. Angel financing increased 22 percent last year, to $22 billion, from $18 billion in 2003, according to Professor Sohl, flowing into 48,000 ventures, a 24 percent jump.

Typical of the groups is the seven-year-old CommonAngels in Lexington, Mass. Its 50 members, most of them the chief executives or founders of technology companies, meet once a month to hear presentations from small businesses. They have a paid manager whose duties include helping to negotiate the final terms of agreements and transferring the money to the entrepreneur.

Business owners can raise significant amounts of money from these groups. While individual investors tend to put in $25,000 to $100,000, according to James Geshwiler, managing director of the CommonAngels and chairman of the Angel Capital Association, total investment from a group can be about $1 million for a first round of financing.

Consider Cornelius Peterson. Two years ago, he started a company called Interactive Supercomputing in Waltham, Mass., to sell software that improves the ability of engineers and scientists to program high-performance computers.

He knew that getting the product to market quickly would require a significant amount of money. So, earlier this year, Mr. Peterson, a member of CommonAngels, turned to that group. He raised $800,000 as a bridge loan from 18 investors.

John Regan did even better 18 month ago. As the chief executive of Parcxmart in Hampton Falls, N.H., the maker of an electronic technology for paying parking meters, he raised $2 million from 25 investors associated with East Coast Angels, a group based in Portsmouth, N.H.

More recently, angel groups have been teaming with one another, much as venture capitalists do, thereby offering entrepreneurs the opportunity to attract larger investments.

A case in point is MetricVision in Newington, Va., which makes laser radar-measurement devices for the aerospace industry. The company, which was spun off from a high-tech instruments maker, Thermo Electron, in 2000, raised about $3 million over two years from no less than four angel groups in the mid-Atlantic area.

In April, MetricVision, with about $3 million in revenue, was sold to Metris, a Belgian measurement and testing company, for about $6 million.

Of course, many angel groups also dole out smaller sums, especially in a first round. Last year, Jeremy Black needed about $300,000 to help his company, Aquatic Behavioral Technologies in Frisco, Colo., start manufacturing its product, an electronic form of bait for catching lobster. Mr. Black raised about $180,000 from six investors in CTEK Angels, a group based in Denver. The rest came from other individuals.

Like venture capitalists, angels provide expertise to the start-ups they invest in. That can mean anything from marketing advice to a seat on the board. At Parcxmart, one angel investor is working as the acting chief financial officer.

Even seasoned entrepreneurs like Mr. Peterson of Interactive SuperComputing, who has started three other companies, say they benefit from investors' insights. One CommonAngels member with long experience in a related industry acted as an adviser to Mr. Peterson's company for nine months.

Despite the availability of more angel money, getting a piece of it is perhaps becoming harder. Professor Sohl of the Center for Venture Research says the portion of angel financing that goes to very-early-stage companies has dipped to about 43 percent from the 80 percent that prevailed until about 2000.

Just getting their attention can be tough. Mr. Wheeler of MicroPhage spent many months networking with local angels who could exert their influence once he appeared before a group that they belonged to.

Then there's the application process. Companies must often appear before screening committees before they are permitted to make presentations to a larger number of investors. They also have to be patient; the time it takes for angels to check them out has doubled to an average of four months, from just two at the height of the Internet boom, according to Professor Sohl.

Once they raise the money, entrepreneurs must nearly redouble their efforts to make their investors happy. Tom Bouchard, the chief executive of MetricVision, the company that was eventually sold to a Belgian buyer, says he held a monthly conference call with representatives of each angel group that invested. And, once a quarter, he visited each group to give a presentation.

''It was important to see them in person,'' Mr. Bouchard said.

Photo: Jack Wheeler, left, who obtained angel backing, and a research associate, Zach Engelbert, at Microphage. (Photo by Carmel Zucker for The New York Times)